A Semiconductor Stock to Consider

Texas Instruments (NASDAQ: TXN) designs and manufactures semiconductor chips for designers around the globe. It functions through four segments: analog, embedded processing, wireless, and other.

In line with the decision to exit the volatile mobile computing segment, it closed its OMAP unit for smartphones and tablets last year. The result was a more focused company and a 27% gain . The company declared its 2Q13 results last month, and it became evident that the decision to exit from mobile computing is paying off.

Impressive performanceTexas Instruments' revenue increased 6%, sequentially, or 8% if legacy wireless revenue is excluded. On a consolidated basis, sales declined 8.6% from the year-ago level to $3.05 billion. The sequential growth in revenue was assisted by the company's strong performance in the industrial and automotive markets.

Earnings increased from $446 million to $660 million, or $0.58 per share. This included a component of $0.16 per share that resulted from the sale of wireless assets. Also, the company's book-to-bill ratio was a healthy 1.03, which means that order inflow is strong.

Looking forwardAs a result of encouraging 2Q13 results, Fitch has lifted its outlook on Texas Instruments to "stable." In addition, it also believes that the company will benefit from cost reductions stemming from its wireless exit.

Texas Instruments' orders grew 6%, sequentially, in the previous quarter. This is a healthy sign and, given the fact that the automotive industry is on a rolland there's strong demand for industrial segment products, the future of these two segments looks good. Texas Instruments earned 35% of its revenue from these two segments, which is one of the reasons investors should be bullish about the company's prospects. Car sales have been surging in the U.S. and, as more cars come with advanced in-car infotainment, navigation, and other technology, the demand for Texas Instruments' chips will increase.

Car sales in July surged to pre-crisis levels of 2007. According to the Wall Street Journal, this momentum is expected to continue on the back of an upswing in construction and energy exploration, while low interest rates provide a further boost. Texas Instruments stands to gain from growing auto sales.

The industrial outlook in the U.S. is also improving. According to the Manufacturers Alliance for Productivity and Innovation, industrial production in the U.S. is expected to increase 3.1% this year, up from the earlier forecast of 2.2% in March 2013. Growth is expected to accelerate further in 2014, reaching 3.6%. These factors bode well for Texas Instruments.

Over the past 12 months, the company has paid $971 million in dividends, which is 34% of free cash flow. It has also repurchased $2.6 billion worth of shares. The company is doing well returning cash to shareholders, and it is expected that this will continue going forward.

CompetitorsSome other semiconductor players in the U.S. are Atmel (NASDAQ: ATML) and Freescale Semiconductor (NYSE: FSL) .

Atmel is attempting to grow its business by concentrating on touch sensors in mobile, but this has not gone according to plan. Though Atmel has seen design wins from Sony, Lenovo, and Asus, slow adoption of touch-enabled computers has held it back. The company's lack of diversification hasn't helped either, as the majority of revenue comes from supplying microcontrollers. Depending on touch-enabled Windows PCs is certainly not a good idea for growth.

Weakness was evident in the previous quarter, as revenue dropped 6% from the year-ago period. Also, excluding one-time items, non-GAAP earnings were $0.06 per share compared to $0.08 per share last year.

At a beta of 2.9, Atmel is riskier than Texas Instruments, with a beta of 1.35. Even though it appears as if Atmel may profit from Android tablets with customers such as Samsung, Texas Instruments has a more diversified business and is where investors should put their money.

Freescale Semiconductor has also been struggling, operating in the red for most of the last three years, but the company now appears to be in turnaround mode. Management hired former Texas Instruments executive, Gregg Lowe, as CEO last year, and the stock's 35% appreciation indicates that the turnaround strategy is working.

In the recent quarter, Freescale beat estimates on both revenue and earnings, as revenue rose 1% from last year. Analysts expect the company to benefit from sales of its microcontrollers in China as it has more than 500 clients in the region, according to a Citigroup analyst. Also, RBC Capital believes that the roll-out of 4G in China by China Mobile will also help Freescale's growth. So, this is another turnaround story to watch.

ConclusionAtmel is bleeding as Windows PCs aren't helping its business, while Freescale is trying to turn around. However, it is Texas Instruments that seems to be the best-positioned, considering its dominant position in end markets and lucrative program of returning cash to shareholders. Investors should consider this stock.

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